After WTO shock, Centre set to subsidise home, foreign solar power projects

After losing a case to the US at the World Trade Organization for favouring local manufacturers in its solar power programme, India is finalising a scheme to subsidise both domestic and foreign companies that will manufacture in the country, without running contrary to the WTO rules.

Key facts:

In this regard, the ministry of new and renewable energy (MNRE) has prepared a draft Cabinet note of the scheme for inter-ministerial consultation.

According to the draft, the government is planning to support domestic manufacturing through direct subsidy in the form of either interest subvention or cheaper land bank to be made available to companies that want to make in India.

The draft scheme will be placed before the Cabinet for approval after the consultation process gets over. Once approved, companies like US-based FirstSolar or China’s Trina Solar will be able to reap the same benefits as any domestic company.

Background:

In a bid to promote local manufacturing, the government had mandated that a certain portion of capacity addition be reserved for domestically sourced modules under the national solar mission. The companies that use such modules are eligible for participating in the tariff-based bidding process.

WTO ruling:

In 2013, the US filed a complaint before the WTO, arguing that the domestic content requirement imposed under India’s solar programme violates global trading rules by unfavourably discriminating against imported solar cells and modules.

In February this year, a WTO panel ruled that by imposing the domestic content requirement India had violated its national treatment obligation.

Again, earlier this month, India lost an appeal at the WTO against the February ruling. Since the appeal ruling is final, India is now supposed to bring domestic laws into compliance with the WTO norms.

What’s the issue?

It all started with the announcement of India’s national solar programme, which was launched in 2010. This programme aims to “establish India as a global leader in solar energy, by creating the policy conditions for its diffusion across the country as quickly as possible”.

To incentivise the production of solar energy within the country, the government under the programme agreed to enter into long-term power purchase agreements with solar power producers, effectively “guaranteeing” the sale of the energy produced and the price that such a solar power producer could obtain.

Thereafter, it would sell such energy through distribution utilities to the ultimate consumer. However, a solar power producer, to be eligible to participate under the programme, is required compulsorily to use certain domestically sourced inputs, namely solar cells and modules for certain types of solar projects.

In other words, unless a solar power producer satisfies this domestic content requirement, the government will not ‘guarantee’ the purchase of the energy produced.

But the US argued that India violated its “national treatment” obligation by unfavourably discriminating against imported solar cells and modules. Thus, indicating a clear violation trade commitment.

How India defends its move?

India principally relied on the ‘government procurement’ justification, which permits countries to deviate from their national treatment obligation provided that the measure was related to “the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or use in production of goods for commercial sale”.

India also argued that the measure was justified under the general exceptions since it was necessary to secure compliance with its domestic and international law obligations relating to ecologically sustainable development and climate change.

What the WTO says?

After a detailed examination, WTO concluded that India, by imposing a mandatory domestic content requirement, had violated its national treatment obligation.

In so far as the government procurement derogation was concerned, WTO found that the product being subject to the domestic content requirement was solar cells and modules, but the product that was ultimately procured or purchased by the government was electricity.

The domestic content requirement was therefore not an instance of “government procurement”.

Besides, WTO also found that since India failed to point out any specific obligation having direct effect in India or forming part of its domestic legal system, which obligated India to impose the particular domestic content requirement, the general exception was not available to the Indian government in the instant case.

Was India really wrong?

The ruling has been described as yet another instance of archaic trade rules trumping important climate imperatives. It is being seen as undermining India’s efforts towards promoting the use of clean energy. However, this criticism is not entirely justified.

There appears to be no rational basis for how mandatory local content requirements contribute towards promoting the use of clean energy.

Besides, by mandatorily requiring solar power producers to buy locally, the government is imposing an additional cost, usually passed on to the ultimate consumer, for the production of clean energy. The decision may therefore stand to benefit the interest of the ultimate consumer.

How should the policy be?

If the objective is to produce more clean energy, then solar power producers should be free to choose energy-generation equipment on the basis of price and quality, irrespective of whether they are manufactured locally or not.

It is entirely possible to give preferential treatment to clean energies (in the form of tax rebates for solar power producers and so on) without requiring mandatory local content.

Way ahead:

This ruling is not final. India is exploring the option of filing a counter complaint against the U.S., with several states in the U.S. such as Michigan, Texas and California having also reportedly been accused of employing mandatory local content requirements in the renewable energies sector.

Conclusion:

US solar exports to India have fallen by more than 90% since India brought in the rules, the US is learnt to have claimed. Analysts have said the attraction of India being a lucrative market for global solar power players is at the heart of the trade disputes between the two countries. India aims to sharply raise its solar power capacity to 100 gigawatt (GW) by 2022 from just 8.1 GW as of June this year. Hence, it is good for India to cautiously proceed ahead in this regard. India must also resist the temptation of adopting protectionist measures such as domestic content requirements which are inconsistent with its international obligations. Domestic content measures, despite their immediate political gains, have a tendency to skew competition. Manufacturers must remain free to select inputs based solely on quality and price, irrespective of the origin. The government must continue working towards building a business and regulatory environment which is conducive to manufacturing. This would require systemic changes in the form of simpler, transparent and consistent laws and effective dispute resolution mechanisms.